Applied Economics Letters

ISSN: 1350-4851 (Print) 1466-4291 (Online) Journal homepage: https://www.tandfonline.com/loi/rael20

Ancillary market signalling: A two-stage model of

economic reputation on ancillary market success

Daniel Kaimann

To cite this article: Daniel Kaimann (2019): Ancillary market signalling: A two-stage model
of economic reputation on ancillary market success, Applied Economics Letters, DOI:
10.1080/13504851.2019.1683136

To link to this article: https://doi.org/10.1080/13504851.2019.1683136

Published online: 25 Oct 2019.

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APPLIED ECONOMICS LETTERS
https://doi.org/10.1080/13504851.2019.1683136

ARTICLE

Ancillary market signalling: A two-stage model of economic reputation on

ancillary market success
Daniel Kaimann
Department of Management, Paderborn University, Paderborn, Germany

ABSTRACT KEYWORDS
Due to high market search costs, public information can have a stronger impact than private Ancillary market; signalling
information on consumer choice behaviour. As a result, a priori economic success serves as a signal theory; information
of high quality, reduces information asymmetries and can thus have an influence on the market asymmetry; economic
reputation; Hollywood
performance in ancillary markets. Using weekly sales data from the ancillary DVD market, consist-
economics
ing of 8664 movies and their commercial performance between 2006 and 2018, we empirically test
the influence of economic reputation on ancillary market success. We find clear evidence to JEL CLASSIFICATION
suggest that former box office and DVD market success is positively associated with DVD sales. C33; D82; L14; L82
We additionally show that for distributors it is rational to follow a price skimming strategy of
setting prices high when introducing new products to the market. These results provide practical
insights into how businesses can maximize their profits by improving their decisions concerning
product launch strategies.

I. Introduction performance in ancillary markets. We focus on the

impact of economic reputation and its signalling
One cause of asymmetric information is the fact
effect on reducing information asymmetries. The
that information gathering is conjoint with
motion pictures industry, with its ancillary DVD
costs. This may lead to a rudimentary informa-
rental and sales markets, represents an ideal object
tion search by the market participants. Due to
of research in order to analyse the question of how
resulting search costs, it can be rational to adapt
economic reputation can resolve information asym-
one’s own decisions to the ones of the other
metries. First, products related to media represent
market participants. Banerjee (1992, 798–799)
experience goods. An experience good is character-
states that if a consumer stands in front of two
ized by the consumer’s a priori lack of information
unknown restaurants whose quality he cannot
about a product’s quality before consumption
assess, he will probably choose the restaurant
(Nelson 1970, 1). This hidden information about
that has more guests, presuming that at least
quality leads to an information asymmetry among
some of the guests have better information.
consumer and producers. Second, the development
Thus, it may happen that individuals make deci-
of cinema attendance figures and, consequently, of
sions that are contrary to their own private
box office gross figures are information on the movie
information. If they decide sequentially, the
market that are relatively easily available. In accor-
decisions of their predecessors and, therefore,
dance with Banerjee’s example, it can be assumed
the public information can have stronger weight
that consumers select the DVD movie that had the
than the private information. As a result, public
highest number of cinema visitors. Consequently,
information about the selection of goods and
DVD viewers will not inform themselves any longer
services serves as a signal of high quality and
about the qualities and characteristics of the movie.
reduces information asymmetry.
Thus, the motion picture industry with its various
We adopt signalling theory and describe rational
chains of commercialization offers the opportunity
choice behaviour in the presence of information
for analysing economic reputation and ancillary
asymmetry (Spence 1973). By this means, we analyse
market signalling.
the influence of a priori economic success on the

CONTACT Daniel Kaimann Daniel.Kaimann@uni-paderborn.de Department of Management, Paderborn University, Paderborn, Germany
© 2019 Informa UK Limited, trading as Taylor & Francis Group
2 D. KAIMANN
The ancillary market of DVD sales has not been
analysed in many studies, a circumstance mainly
due to the challenging data limitations. One of the
first studies to measure the correlation between
a movie´s cinema and video release came from
Frank (1994). He was able to show theoretically,
as well as empirically, for the German market that
a growing video market shortens the period of
exclusiveness. Jozefowicz, Kelley, and Brewer
(2008) conducted one of the first empirical analyses
of video rental success. They found a strong sig-
nificant influence of box office revenue, stardom,
the two MPAA ratings Restricted (R) and Parents
Strongly Cautioned (PG-13), and genres on VHS
and DVD gross rental revenues. In his empirical
study of 44,800 DVD titles released between 1997
and 2007 in the Australian market, McKenzie
(2010) found a high correlation between theatrical
success and DVD revenues, which is verified across
all movie genres and age classifications. Walls
(2010) could not verify these findings in his empiri-
cal analysis of 953 DVD titles that appeared on the
weekly top-30 sales charts in North America over
a 30-month interval. Where former weekly reven-
ues can serve as a signal to overcome moviegoers’
information asymmetries in the theatrical market,
Walls did not find such evidence of information
feedback in the analysis of the DVD market. In
addition, revenues appear to be distributed more
heterogeneously among titles in the DVD market
in comparison to in the theatrical market.
Therefore, we analyse how economic reputation
overcomes information asymmetries in the context
of the experience goods market of movies and
DVDs by addressing the following questions:
What is the influence of economic reputation on
ancillary market success? Which are the specific
determinants of ancillary market success? How do
these determinants interact with each other to indi-
cate an observable product quality?
II. Data and model
One way to test the influence of economic reputa-
tion on ancillary market success would be to spe-
cify a single-equation demand model of DVD unit
sales in terms of its drivers (e.g. critic reviews,
MPAA ratings or genre classifications) and specifi-
cally former box office success. However, such
a model specification would not be able to capture
the dynamic interrelationships among the different
chains of commercialization. A single-equation
approach would thus lead to biased estimates of
the influence effects of variant drivers of DVD
market success. Following Elberse and Eliashberg
(2003) and Basuroy, Desai, and Talukdar (2006),
we use a two-stage simultaneous equations model.
We develop a two-stage independent equation
model, where one equation has box office sales as
the dependent variable and one equation with
DVD unit sales as the dependent. Particularly, we
consider box office success an endogenous variable
to account for the expected dynamic relationship
between cinema and DVD market success. In addi-
tion, we model current DVD market success as
a function of DVD market success in the past to
capture customer habits in the dynamic panel data
structure.
Equation 1 specifies the demand for movies in
cinema as a function of production costs of movie i,
movie characteristics and market controls:
ln Box Office Salesi ¼ α þ β1 ln Production Costsi
þ β2 Movie Controlsi þ εi
(1)
where Box Office Sales contains the total rev-
enues of movie i over its life cycle. The vari-
able Production Costs serves as a ‘proxy
variable’ for the overall technical and artistic
quality of a movie (see Litman 1983). In addi-
tion, it also represents sunk costs in the first
stage, as the production costs of movie i have
already been incurred for the cinema release
and cannot be recovered during the ancillary
market commercialization. The vector Movie
Controls consists of additional movie success
drivers, namely the genre and age classification
of movie i, the reviews from professionals and
consumers, the appearance of star actors
(according to the Quigley poll list), the num-
ber of received Academy Awards, and the
identification of sequel, prequel, and book
adaption titles.
Equation 2 specifies the demand for a DVD as
a function of former cinema and DVD market
 APPLIED ECONOMICS LETTERS 3

success, the market unit price of movie i at time t Leenders 2007). Summary statistics for variables
and the time lag between the first and second mar- used in the empirical analysis can be found in Table 1.
ket release:

d Salesit
ln DVD Salesit ¼ γ þ δ1 ln Box Office
þ δ2 ln DVD Salesiðt1Þ
þ δ3 ln DVD Salesiðt2Þ
þ δ2 ln Average Product Priceit
þ δ3 Release Time Lagit
þ δ4 Movie Controlsit þ
it ;
(2)
where DVD Sales represents the weekly revenues in
DVD sales of movie i at time t. In the dynamic
model framework, the value of the dependent vari-
able Box Office Sales and DVD Sales in the previous
periods are a predictor for the current value of the
dependent variable. In addition to former cinema
market success, we therefore include the time
lagged values ðt  1Þ and ðt  2Þ of DVD Sales.
The variable Average Product Price controls for
possible price effects and Release Time Lag is the
difference of the cinema and DVD release time,
thus controlling for eventual marketing time-lag
effects. The vector Movie Controls presents the
above described additional movie success drivers.
To empirically test the influence of economic repu-
tation on ancillary market success, we construct
a panel dataset consisting of 8664 movies and their
DVD commercial performance between 2006 and
2018. Sales figures are obtained from the-numbers.
com, while other additional information (e.g. genre,
age rating, Oscar wins, etc.) are obtained from Box
Office Mojo and IMDb. Product reviews are obtained
from Rotten Tomatoes, a website that specifically
reviews movies based on a weighted average score
based on professional and user responses.
Additionally, we used the logarithm of the movie
success and budget measures to correct for skewed
distribution (see Gemser, Van Oostrum, and
III. Results
Table 2 summarizes the estimation of the relationship
between DVD sales, economic reputation, prices,
ancillary market signalling, and consumer prefer-
ences. Two-stage least squares random-effects estima-
tions are displayed representing the model outlined in
Equation 2. The regression output is remarkably con-
sistent between model specifications, indicating
robust findings. We additionally present correlation
coefficients between our main variables in Table 1.
The correlation coefficients remain relatively small.
Hence, potential multicollinearity concerns can be
neglected and are well below the threshold where
multicollinearity would significantly affect our results.
Focusing on a priori economic success on the per-
formance in ancillary markets (Model I), it appears
that former box office success is positively associated
with DVD sales. A 1% increase in box office revenues
is found to increase the DVD sales by 0.3% on average.
In addition, we find a similar relationship between
product prices and market sales. If we change the
average product price by 1%, we expect the sales in
ancillary markets to change by 0.2%. When the lagged
DVD sales are considered in Model II and III,
a somewhat different pattern emerges. The estimated
elasticity of former DVD sales is approximately 0.7
(t-1) and 0.2 (t-2), while the elasticity of box office
success diminishes to 0.1 and the elasticity of the
average product price decreases to 0.06. These results
suggest that the influence of previous DVD sales
dominates that of cinema sales if both are controlled
for simultaneously. The release time lag between the
cinema and DVD market may be statistically signifi-
cant in Model I and II, but show no economic sig-
nificance across model specifications. Broadly
speaking, this may suggest that the signalling effects

Table 1. Descriptive statistics.

Variable Obs Mean Std. Dev. Min Max (1) (2) (2) (3) (4) (5)
(1) DVD Sales (US$) 8664 39,011,548 42,336,115 2,244,703 279,046,391 1
(2) Weekly DVD Sales (US$) 8664 2,832,912 7,641,040 3,338 174,039,324 0.18 1
(3) Box Office Sales (US$) 8664 210,457,995 208,723,983 4,000,000 1,328,111,219 0.19 0.03 1
(4) Production Costs (US$) 8664 88,467,292 66,975,751 15,000 300,000,000 0.27 0.08 0.43 1
(5) Average Product Price (US$) 8664 30 430 4 16,353 −0.02 −0.00 −0.02 −0.03 1
(6) Release Time Lag (Days) 8664 −610 2234 −21,033 167 0.14 0.06 0.12 0.24 0.01 1
4 D. KAIMANN

Table 2. Two-stage least squares random-effects regression. difference between two market releases is of minor
Dependent variable: in weekly DVD importance.
sales
Independet Variables I II III Regarding the control variables, it appears that
ln Box Office Succes 0.300*** 0.100*** 0.092*** science fiction movies have a significant positive effect
(0.114) (0.026) (0.028)
ln Weekly DVD Sales (t-1) 0.753*** 0.559*** on DVD sales (compared to other movie genres).
(0.006) (0.018) A 1% increase in the distribution of science fiction
ln Weekly DVD Sales (t-2) 0.195***
(0.015) movies decrease demand of around 0.1% on average.
ln Average Product Price (per week) 0.199*** 0.059*** 0.053*** This finding is in line with Litman (1983), who has
(0.020) (0.008) (0.008)
Release Time lag 0.000*** 0.000* 0.000 shown that a movie released in the science fiction
(0.000) (0.000) (0.000)
Movie Controls
category increases a distributor’s revenue by approxi-
Genre Reference Category Others mately $5.9 million. The remaining control variables
Action −0.050 −0.038 −0.041
(0.102) (0.025) (0.027) do not show a statistically significant relationship
Animation −0.197 −0.025 −0.005 across model specifications.
(0.147) (0.031) (0.033)
Comedy 0.026 0.027 0.050
(0.109) (0.028) (0.031)
Drama 0.055 −0.027 −0.030 IV. Conclusion
(0.120) (0.036) (0.040)
Horror 0.374*** 0.015 0.028
(0.137) (0.049) (0.058) The ancillary market of DVD rental and sales satisfies
SciFi −0.254** −0.089** −0.095** the assumptions of an experience goods markets with
(0.122) (0.035) (0.039)
Thriller 0.111 −0.039 −0.057 prevailing information asymmetries between distri-
(0.173) (0.053) (0.053) butors and consumers. Our analysis shows that
MPAA Rating Reference Category R
G −0.089 0.029 0.047 a priori economic success can serve as a signal and
(0.178) (0.043) (0.045) thus has an effect on the performance in ancillary
PG −0.171 −0.016 −0.002
(0.107) (0.026) (0.030) markets. We additionally show that for distributors
PG-13 −0.255*** −0.044* −0.026
(0.083) (0.022) (0.024)
it is rational to follow price skimming of setting prices
Reviews from Rotten Tomatoes high when introducing new products to the market.
Professional Critics −0.003* −0.001 −0.001
(0.002) (0.000) (0.000) This strategy enables businesses to maximize profits
Word-of-Mouth −0.002 0.002* 0.002** before competitors enter the market.
(0.003) (0.001) (0.001)
Addtional Movie Characteristics
Appearance of Star Actor(s) −0.138* −0.005 0.002
(0.079) (0.020) (0.023) Disclosure statement
Academy Awards Wins 0.004 −0.002 0.000
(0.034) (0.011) (0.011)
Franchise Effects 0.009 0.012 0.018 No potential conflict of interest was reported by the author.
(0.064) (0.018) (0.019)
Constant 8.371*** 1.079** 1.088**
(1.910) (0.465) (0.484)
Observations 8,664 8,028 7,392 Funding
R-squared 0.06 0.75 0.70
Robust standard errors in parentheses. This work was partially supported by the German Research
*** p < 0.01, ** p < 0.05, * p < 0.1 Foundation (DFG) within the Collaborative Research Centre
‘On-The-Fly Computing’ (SFB 901).

of economic reputation attract consumers, whereas

the economic success in the same market outweighs
that from former markets. Additionally, a price skim-
ming strategy seems to be the ideal strategy to max-
imize DVD sales, as high average product prices are
associated positively with higher sales. When releasing
a DVD movie, a firm initially sets a very high price
and subsequently lowers the price substantially. This
pricing strategy is referred to as ‘rental pricing’ and
has historically been used for the vast majority of titles
in the industry (Mortimer 2007). However, the time
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